Coronavirus blow to India's diamond industry! ICRA downgrades outlook amid weak demand

Rating agency ICRA has revised its outlook for Indian cut and polished diamond industry from stable to negative in the light of coronavirus pandemic and weak demand in key markets. The downgrade in outlook comes as parts of China and Hong Kong remain under lockdown due to the deadly virus outbreak.

The ratings agency pointed out that China and Hong Kong (C&HK) region accounts for 14-15 per cent of global demand of cut and polished diamonds. Industry estimates show that the region accounts for 35 per cent of India's overall cut and polished diamond (CPD) exports.

China is a major market as it not only consumes imported diamonds locally, but also produces diamond studded jewellery and exports the same to the US, South East Asia and other markets in a big way, ICRA said. The export of polished diamonds to China is largely routed through Hong Kong, which is a major global diamond trading hub alongside Belgium and the United Arab Emirates, the ratings agency further added.

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The cut and polished diamond industry has been feeling the heat due to ongoing trade and political tensions between China and the United States. Matters have taken a turn for the worse with economic shutdown due to coronavirus outbreak, which "occurred during the busiest period for jewellery sales in China - the peak of the festive Lunar New Year extending from January 25 to February 08, 2020", ICRA said.

"Apart from recent developments in China, the CPD industry had been going through weak demand conditions in key markets and pressure on gross margins due to declining finished prices. If the business lockdown continues in C&HK, industry pressure will aggravate thereby impacting cash flows. This can have a serious bearing, especially given the cautious lending to the sector and; potentially impact CPD players' credit profile," said Jay Seth, Vice President, Corporate Ratings, ICRA Limited.

"The pandemic in China will also hit near-term global demand for CPD and the widespread economic shutdown in C&HK region which will further delay demand recovery," he further added.

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CPD exports from India are down 17.6 per cent Y-o-Y during 9M FY2020 on account of the trade and political tensions and subdued macro-economic environment in markets other than the US. And now with potential adverse coronavirus impact, exports are likely to remain weak in current fiscal, ICRA said.

The cash flows of CPD companies will be also impacted due to delay in collections and inventory build-up. Most of them avail pre-shipment or post shipment credit (export bills discounting of tenor upto 120-150 days) from banks to fund their working capital requirements, the ratings agency said. The impact on companies' liquidity will become evident as more bills come overdue during the second half of February and March, if the amount is significant, it further added.

"Receivables delay from C&HK region beyond a reasonable time will mean companies will have to make good the payment out of their funds which in turn could pressurise their liquidity position," ICRA said.

On the positive side, Indian CPD companies could fulfil the demand for diamond studded jewellery in key markets as China and Hong Kong remain under lockdown. However, the industry would face elevated inventory levels if the shutdown continues till April, the report cautioned.

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